A commentary on insurance coverage issues in Hawaii and beyond

Duty to Cooperate

July 18, 2016

The insured's claim that the insurer improperly refused to provide a supersedeas bond was rejected by the federal district court. James River Ins. Co. v. Interlachen Property Owners Ass'n v. Kuepers Constr., 2016 U.S. Dist. LEXIS 71825 (D. Minn. June 1, 2016).

Kuepers Construction, Inc. constructed a townhome project on property owned by the Association. After completion of the project, the Association sued Kuepers for construction defects on the project. Kuepers tendered its defense to State Auto Insurance Company, its CGL carrier. Later, the Association amended its complaint to assert claims for professional engineering negligence and professional design negligence. Kuepers tendered these claims to James River, who had issued an Architects and Engineers professional Liability policy. James River agreed to defend subject to a reservation of rights.

On summary judgment in the underlying case, the design claims were dismissed as well as certain construction defect claims. The remaining claims continued to trial. James River agreed to continue to provide a defense to the action pending and through any appeal of the summary judgment order.

The remaining construction defect claims were tried and the jury returned a verdict against Kuepers. Judgment was entered against Kuepers for $2,147,000. Kuepers requested State Auto to post a supersedeas bond to stay execution while the case was appealed. State Auto refused. Kuepers then demanded that James River post the bond. James River also refused, relying on policy language that provided James River would pay,

reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a "claim", including the cost of appeal bonds, however, we shall not be obligated to apply for or furnish appeal bonds on your behalf.

The Association filed a notice of appeal, seeking to reinstate the design defect claims against Kuepers that had been dismissed by summary judgment. An agreement was reached whereby Kuepers stipulated to a $2,000,000 judgment on the design defect claims and assigned its rights under the James River policy to the Association. The agreement was then sent to James River.

This action was filed by James River, seeking a determination that the agreement was collusive and unenforceable. Kuepers filed counterclaims, seeking a declaratory judgment that James River breached the policy by failing to provide the supersedeas bond and that the agreement with the Association was reasonable and enforceable.

James River moved for summary judgment. It argued it did not neglect its duty to defend and was under no obligation to post the supersedeas bond. Kuepers breached the policy's cooperation clause by stipulating to a judgment and assigning rights under the policy to the Association. Kuepers argued that failure to provide the supersedeas bond was a material breach by James River, voiding Kuepers' cooperation obligation.

The court disagreed with Kuepers. The policy did not obligate James River to post the supersedeas bond. The bond would have stayed execution of judgment for damages arising from the jury verdict on the construction defect claims, liabilities that James River did not agree to cover. Requiring James River to post the supersedeas bond would extend its duty to indemnify beyond the policy's coverage, since the posting of a supersedeas bond bound the appellant and its surety to pay the judgment if the appeal was unsuccessful.

Further, since James River did not breach the policy, Kuepers was required to provide notice to James River of the stipulated judgment and assignment of policy rights. Therefore, James River's motion for summary judgment was granted.

The contractor was demolishing a portion of the insured's home when he discovered water damage and what appeared to be mold. The contractor believed this damage was due to improper roof installation and leaks around the windows. Further demolition was done to water-damaged portions of the home.

The insured filed a claim with Encompass for mold and "over-demolition." When Encompass's adjuster inspected the home, none of the alleged mold-affected material was present because it had been removed from the site by the contractor. The claims were denied.

The insured filed suit and Encompass moved for summary judgment. The trial court found that both the claim for mold and over-demolition were covered losses. However, the insured could not recover on the mold because of spoilation of evidence, and was precluded from recovery on the demolition claim due to the exclusion for faulty workmanship.

The appellate court agreed. The insured sought to recover costs associated with the contractor's extensive demolition. The demolition was done either due to the contractor's error or his faulty workmanship, or due to the contractor's addressing faulty workmanship of the persons responsible for the roof and window installation. The contractor was the insured's agent. The insured presented evidence that the contractor acted in error, but even if the contractor's work was faulty, it was excluded under the homeowner's policy.

The insured also argued that the trial court erred in attributing the contractor's disposal of the evidence of mold to the insured. The insured felt the adjuster had a duty to recover the disposed evidence. But the insured had a duty under the policy to allow the insurer "to take samples of damaged and undamaged property for inspection, testing and analysis." This became impossible because the allegedly moldy material was thrown into dumpsters, mixing with other construction debris and was not protected from the weather.

While dismissal of the claim seemed harsh where the insured apparently lacked some degree of knowledge or control over the initial methods in which the materials were removed and disposed of, it was of greater prejudice to Encompass who had absolutely no control over the evidence.

January 22, 2014

The Fourth Circuit affirmed the district court's determination that there was no duty to indemnify after the insured settled without consent of the insurer. Perini/Tompkins Joint Venture v. ACE American Ins. Co., 2013 U.S. App. LEXIS 24865 (4th Cir. Dec. 16, 2013).

The insured, a joint venture, was hired as manager for the construction of a $900 million hotel and convention center. OCIP and excess policies were obtained through ACE. The project was also insured by a Builders Risk Policy through Factory Mutual Insurance Company.

During construction, a rod eroded, causing the atrium to collapse. Substantial property damage occurred and the completion of the project was delayed for several months.

The joint venture was sued for breach of contract and breach of fiduciary duty. Reimbursement of approximately $65 million in damages was sought from the joint venture for an alleged overpayment. The joint venture did not notify ACE of the suit. The underlying suit was settled with the joint venture crediting the owner for over $26 million.

Six months after the settlement and nearly two years after the collapse, the joint venture wrote to ACE advising to the extent that FM Global did not pay the underlying claim, reimbursement would be sought from ACE. However, the letter did not mention the settlement. Ten months later, ACE issued a reservation of rights letter, citing business risk exclusions, late notice, and voluntary payments made without ACE's consent as potential grounds for denial of coverage. Subsequently, FM Global denied the joint venture's claims.

The primary policy provided the insured would not, except at its own cost, "voluntarily make a payment, assume any obligation, or incur any expense," without the insurer's consent. Further, the insured could not sue for coverage unless the policy terms had been fully complied with.

The joint venture argued that under a Maryland statute, an insurer could not disclaim coverage for failure to give notice unless there was actual prejudice to the insurer. Therefore, ACE had to show actual prejudice before denying coverage. The Fourth Circuit decided the central issue was whether the insured could unilaterally settle a construction defect case, present a completed settlement to the insurer, and obtain indemnification despite breaching the policy provisions.

Here, the joint venture could not satisfy the conditions precedent of the voluntary payment and no-action clause because they attempted to settle and voluntarily made payment without ACE's consent. The Maryland statute did not apply, so there was no requirement for ACE to show prejudice.

Finally, the joint venture argued ACE had waived its late notice defense because it ignored the joint venture's claim for an unreasonably long period and even told the joint venture it would pay the claim. There was no showing, however, that ACE had intentionally relinquished its rights under the policy.

Plaintiff had a fourth floor constructed on top of its existing third floor roof. After a concrete slab was poured upon the existing roof, moisture was found in the insulation layer which was decomposing, causing exposure to arsenic in the insulation layer. Water carried the arsenic into the cement topping slab and concentrated, posing a health risk. A consulting engineering firm recommended removing the insulation layer and replacing the floor.

Plaintiff had an all-risk policy with Fireman's Fund. Coverage for the damage was denied. Subsequently, plaintiff removed the concrete slab and the decomposed insulation. Plumbing piping and an air handler were also rehabilitated. Plaintiff did not re-tender the claim to Fireman's Fund either during or after this remediation work.

The parties disagreed on the cause of the moisture that resulted in the arsenic damage. Plaintiff contended the moisture came from a broken water line or cracks in the topping slab. Fireman's Fund argued the moisture came from leakage in the roof prior to construction of the upper floor or exposure of the edge of the roof during the construction.

Plaintiff sued and filed a motion for partial summary judgment that the arsenic damage was covered by the policy. Fireman's Fund first argued that Plaintiff failed to re-tender the claim after "new" potential sources of water infiltration were discovered during the remediation. The Court found that Fireman's Fund's denial of coverage was a breach that relieved Plaintiff of the policy's continuing duty to cooperate. Further, plaintiff needed to quickly remediate and repair the floor to prevent the spread of the arsenic contaminated water instead of waiting for Fireman's Fund to decide whether or not to investigate the damage.

Fireman's Fund next argued that the loss was excluded by various exclusions such as gradual deterioration, wet rot, faulty, inadequate or defective design specifications or construction. An ensuing loss provision provided, however, that if a loss from a covered loss resulted, the resulting loss would be covered.

For purposes of this motion, the court assumed that the moisture infiltration originated from an excluded peril. If, however, a series of events took place that resulted in a loss, damage resulting from an uncovered event would not be covered, but damage resulting from covered events would remain covered. Here, the moisture was a separate and independent event from a design defect in constructing the fourth floor without removing the insulation layer. The moisture was a separate agent that caused damage, even though the design defect may have allowed the agent to enter.

Fireman's Fund also argued the loss was excluded by the pollution exclusion. This exclusion included an anti-concurrent causation clause, which excluded a loss if it resulted from a combination of covered and excluded perils. Here, however, the pollution exclusion expressly reinstated coverage for damage that was the direct result of a covered cause of loss. The arsenic was caused by a covered cause of loss, moisture infiltration, and therefore fell within the exception to the pollution exclusion. This exception contradicted the anti-concurrent causation language. Under Hawaii law, policies must be construed broadly in favor of the insured.

Consequently, the plain language of the exception to the pollution exclusion that allowed coverage for pollution caused by a covered cause of loss prevailed over the anti-concurrent causation clause. Because the arsenic was directly caused by the water infiltration, a covered cause of loss, the direct physical loss or damage caused by the arsenic was covered by the policy under the exception to the pollution exclusion.

This is a significant case because it is the first decision in Hawaii to comprehensively address the ensuing loss provision and the anti-concurrent causation clause.

For a perspective of the case from a construction law perspective, see my colleague Anna Oshiro's summary of the case here.

The insured's van was stolen. Inside the van was a large collection of work tools. The insured submitted a claim for loss of the tools under his homeowner's policy. He told Allstate the tools were worth between $20,000 and $25,000, and that they were for his personal use, although they could be used for work.

Over the next few months, the insured failed to provide requested documentation despite several written requests from Allstate. Allstate made several attempts to schedule an Examination Under Oath (EUO) and produce documents, but the EUO was never conducted and documents were not produced. Finally, Allstate denied the claim. Three and a half months later, the insured's attorney wrote Allstate, stating his client would appear for the EUO if Allstate would agree to extend the contractual time limit for filing suit. Allstate rejected the offer.

The insured sued, but the trial court granted summary judgment to Allstate.

The Washington Supreme Court reversed. There were factual issues regarding whether the insured substantially complied with Allstate's request for an EUO. The insured did appear for two scheduled interviews, giving Allstate ample time to examine him. He also agreed to appear for the EUO if Allstate would extend the deadline for filing suit. These facts created a genuine question of material fact as to whether the insured substantially complied with his duty to cooperate.

Thanks to John S. Vishneski III of Reed Smith LLP in Chicago for providing this case. The case was part of our panel discussion on bad faith issues at the recent ABA, Insurance Coverage Litigation Committee's annual seminar.

August 01, 2012

The Texas Supreme Court considered whether communications between the insurer's lawyer and the employer of the injured employee were privileged. See In Re XL Spec. Ins. Co., 2012 Tex. LEXIS 568 (Tex. June 20, 2011).

XL was Cintas Corporation's workers' compensation carrier. XL's policy required Cintas to cooperate in the investigation, settlement and defense of a claim.

An injured employee of Cintas sought workers' compensation benefits, but XL denied the claim. During an administrative hearing, the hearing officer determined the injured employee sustained a compensable injury and was entitled to medical and temporary income benefits. XL's counsel sent communications about the status and the evaluation of the proceeding's to Cintas.

After the workers' compensation dispute was resolved, the injured worker sued XL for bad faith. The injured employee sought the communications between XL's counsel and Cintas. XL argued the communications were privileged. The trail court held the privilege did not apply.

On appeal, the Texas Supreme Court focused on Rule 503 (b) (1) (C), which is identical to Haw. R. Evidence, Rule 503 (b) (4). The rule provides communications between representatives of the client or between the client and a representative of the client are privileged. The Court denoted this the "allied litigant" privilege. Texas also required that the privileged communication be made in the context of a pending action.

The allied litigant privilege protected communications between a client, or the client's lawyer, to another party's lawyer, not to the other party itself. Here, XL was the client and the communications were between XL's lawyer and a third party, Cintas, who was not represented by XL's lawyer and who was not a party to the litigation. Accordingly, the privilege did not apply.

July 30, 2012

Southgate Gardens Condominium had buildings damaged by Hurricane Wilma in 2005. See Mid-Continent Cas. Co. v. Basedeo, 2012 U.S. App. LEXIS 11864 (11th Cir. June 12, 2012). First State Development Corporation was hired by Southgate to do repairs.

On November 1, 2005, First State completed tarping on the buildings. Thereafter, on November 11, 2005, First State contracted with Southgate to remove and replace the roofs of the Southgate Buildings.

The tarps placed by First State were inadequate and allowed water to enter the unit of Wayne Basdeo and cause damage. Further, when it attached the tarps, First State caused holes to be made in the roofs of buildings, leading to additional damage. First State also left open the mansards (a type of roof which has two slopes on all all sides, but with the lower slope steeper that the upper one). Finally, the peeled-back condition of the roofing allowed rain to enter.

Basdeo filed a claim with Mid-Continent. Mid-Continent could not get First State to cooperate in the investigation. By the end of 2006, Southgate had fired First State. On July 18, 2007, Basdeo and other residents of Southgate sued First State. First State never notified Mid-Continent of the suit and never requested a defense. Southgate also filed suit against First State. Mid-Continent was still unable to communicate with First State. Default judgments were entered against First State in both actions. Subsequently, Mid-Continent formally informed First State it would deny coverage for both cases.

Mid-Continent filed a declaratory judgment action to determine its obligations with the non-cooperative insured. The district court first determined that Mid-Continent could not avoid its duty to defend based on lack of cooperation under Florida law. Second, the district court found there were three occurrences.

The Eleventh Circuit affirmed. This post does not address the lack of cooperation issue, but instead focuses on the number of occurrences issue.

Both parties agreed that the faulty tarping performed by First State constituted an occurrence. But they disagreed on whether the roof repair work performed by First State constituted a single occurrence or two separate occurrences.

Florida used the "cause theory," under which the act which caused the damage, which was neither expected nor intended from the standpoint of the insured, constituted an "occurrence." Mid-Continent argued that the damage caused by work on the flat-top portion of the roofs was not a separate occurrence from the damage caused in connection with First State's work on the mansards. Both the mansards and flat-top portion of the roof were performed under the same contract., Accordingly, the real cause of the damage was the contract with Southgate, which indicated a single occurrence.

The court disagreed. Mid-Continent's argument would redefine an "occurrence" to mean all damages caused by the breach of a contract. Instead, three occurrences transpired: one in connection with the tarping and two in relation to the contracted roof repairs.

June 06, 2012

The insured's duty to cooperate after the insurer initially denies the claim but later agrees to defend under reservations was the issue in Travelers Prop. Cas. Co. of Am. v. Fid. & Guar. Ins. Co., 2012 U.S. Dist. LEXIS 65834 (N.D. Cal. May 10, 2012).

Centex Homes developed several residential communities, subcontracting the construction work to a number of different entities. The subcontractors named Centex as an additional insured under their policies with Travelers. The policies had a "cooperation clause" which required the insureds to cooperate with Travelers with regard to all aspects of coverage.

In 2010, Centex was sued for construction defect claims by homeowners in two different cases. When the cases were tendered to Travelers, it refused to defend or indemnify Centex. After Centex filed suit against Travelers for denial of coverage in one of the underlying cases, Travelers reversed course by agreeing to defend, but subject to a reservation of rights. Travelers reserved the right to seek reimbursement of defense costs. Travelers also denied coverage in the second underlying case before changing its mind and agreeing to defend under a similar reservation of rights.

After agreeing to defend, Travelers sought to appoint counsel because it had a right to control the defense under the policies. Centex refused to allow Travelers to appoint new counsel because Centex had already retained counsel that was actively involved in defending the two underlying cases.

Travelers sued Centex, contending the refusal to accept appointed counsel constituted a material breach of the policies' cooperation clauses. Centex moved for partial summary judgment. The court noted that once the insurer took on the duty to defend, it generally had the absolute right to manage the defense and the insured is required to surrender all control. But when an insurer wrongfully refused to defend, the insured was relieved of its obligations to allow the insurer to manage the litigation and could proceed in whatever manner it deemed appropriate.

Consequently, Travelers lost its right to control the defense of the underlying cases when it declined to participate in the defense of those actions. Because the duty to defend arises immediately upon tender, Travelers' delay in providing Centex with a defense divested it of the right to control the defense. According, Centex's motion for partial summary judgment was granted.

July 26, 2010

Should an insurer be allowed to pursue a federal action for declaratory judgment on its duty to defend where the insured has failed to cooperate in numerous underlying state actions against it? The Fifth Circuit decided the district court erred in staying the declaratory judgment action and allowed the federal case to proceed simultaneously with the state cases. See Medical Assur. Co. Inc. v. Hellman, 2010 U.S. App. LEXIS 12613 (5th Cir. June 21, 2010).

The insured doctor left the country with 350 medical malpractice claims pending against him. Medical Assurance was defending the doctor in proceedings filed under the Indiana Medical Malpractice Act and in state court. Under the statute, a medical review panel had to issue an opinion on every medical malpractice claim before the claim could be pursued in Indiana courts. Only four of the 350 cases against the insured had moved from the review-panel stage to an actual lawsuit in state court.

Medical Assurance's liability policy provided a duty to defend, but the insurer was relieved of those duties if the insured violated the policy's cooperation clause. This clause committed the insured to, among other things, attend all meetings, hearings, depositions, and trials. Medical Assurance sued in federal court, seeking a declaration that it had no duty to defend because the doctor had utterly failed to cooperate in the 350 pending cases.

The district court stayed Medical Assurance's declaratory judgment action because the parallel state court proceedings were underway before Indiana's malpractice panels and courts. The district court determined it would be impossible for Medical Assurance to show actual prejudice due to the lack of cooperation without interfering with the state proceedings.

The Fifth Circuit vacated the stay. The purpose of the Declaratory Judgment Act was to facilitate efficient outcomes. Here, that purpose would best be effected by allowing Medical Assurance to go forward with its federal case to determine its duty to defend. The issue of whether lack of cooperation should relieve the insurer of its duty to defend was sufficiently distinct from the liability issues in the state proceedings that staying the federal action was an abuse of discretion.

November 11, 2009

A default judgment against the insured should not deprive the injured party from pursuing the coverage litigation according to the Ninth Circuit's decision in Westchester Fire Ins. Co. v. Northwest Airlines, Inc., No. 07-17383, 2009 U.S. App. LEXIS 23718 (9th Cir. Oct. 28, 2009).

The insured provided maintenance services for Northwest Airlines at the McCarran International Airport in Las Vegas. The insured's liability policy required prompt notice of any possible claim be given the insurer.

In February 2002, an aircraft owned by Northwest was damaged when it rolled down an embankment. An employee of the insured was in the cockpit at the time of the incident. The insured did not report the incident to Westchester. A few months later, Northwest wrote and notifiedthe insured of Northwest's claim and requesting that the insured forward the correspondence to Westchester. The insured still did not notify Westchester.

In November 2003, Northwest directly notified Westchester of the accident and the claim against the insured. This was Westchester's first notice of the claim. Westchester commenced efforts to contact the insured and remind it of obligations under the policy. When the insured was finally contacted, it promised to send to Westchester documents related to the claim, but the documents were never provided.

Northwest filed suit in Minnesota and secured an default judgment against the insured for $10.6 million. Westchester issued a denial of coverage letter to the insured based on failure to cooperate and failure to notify Westchester of the Minnesota lawsuit.

Westchester then filed an action for declaratory judgment that the insured had breached its duties under the policy and the insurer had no duty to defend or indemnify. Northwest was allowed to intervene. Westchester made repeated attempts to depose the insured, but the insured never attended the scheduled depositions. Westchester moved to strike the insured's answer or compel the deposition. The court granted the motion to compel, but denied the motion to strike. When the insured still failed to attend scheduled depositions, however, the court granted the motion to strike and entered a default judgment against the insured under Rule 37 (d) for failure to respond to discovery. Subsequently, an order entered judgment in favor of Westchester and against all defendants, including Northwest.

Northwest appealed. Northwest argued it was entitled to defend against Westchester's declaratory judgment action in its own right and that the district court should not have entered a default judgment against all defendants based on the insured's failure to appear for a deposition.

In an opinion by Judge Clifton (of Hawai`i), the Ninth Circuit agreed. A default entered against an insured should not prevent an injured third party from proceeding on its own behalf. Northwest was not responsible for the insured's failure to appear for the deposition.

Westchester argued that Northwest could not prevail because the insured failed to give proper notice of the claim as required under the policy. Although this argument might eventually prevail, the default and subsequent judgment did not result from a determination that the insured's failure to notify the insurer about a potential claim relieved the insurer from liability. Northwest was entitled to present arguments to establish coverage and have them adjudicated on the merits.